A macro view of the fiscal health of States

Source: The post is based on the article “A macro view of the fiscal health of States” published in “The Hindu” on 5th July 2023.

Syllabus: GS 3 – Government Budgeting

News: The article discusses the fiscal operations of the Indian states and highlights the importance of understanding state finances to improve country’s fiscal situation.

Indian states mobilize over a third of total revenue, spend 60% of combined government expenditure, and have around 40% share in government borrowing. The basis of this analysis relies on the data collected from the budgets (2023-24) of 17 major States in India.

What are the majors finding of this analysis?

The general government deficit and debt, which increased during the COVID-19 pandemic, has started to recede.

The Union level fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).

All-State fiscal deficit was 4.1% of GDP in 2020-21, and it is expected to be 2.9% of GDP for the major States in 2023-24 (BE).

These 17 major States contained their fiscal deficits despite revenue contraction during the peak of the COVID-19 pandemic.

Factors that led the improvement in the fiscal situation

1. Union-State fiscal coordination during Covid,
2. Expenditure-side adjustments,
3. improved GST collection,
4. higher tax devolution, and
5. recovery in non-GST revenues.

What are the remaining Fiscal challenges?

The reduction in the fiscal deficit has not been accompanied by a corresponding reduction in revenue deficit. Out of 17 major states, 13 states have a deficit in the revenue account in 2023-24 (BE).

The all-State share of revenue deficit in fiscal deficit for the same year is expected to be 27%.

The 12th Finance Commission identified three States, as fiscally stressed States, in term of revenue deficit. This number has increased to seven.

What should be done?

The focus should be brought back to the management of the revenue deficit. Following are some suggested measures:

Linking interest-free loans to States with a reduction in revenue deficit can prevent diversion of borrowed resources and incentivize fiscal discipline.

Implementing performance incentive grants based on revenue deficit reduction can further encourage fiscal balance and quality expenditure.